This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our privacy policy to learn more.

Financial Reporting Goes Global

International standards affect U.S. companies and GAAP.

THERE IS A CLEAR TREND
toward adopting IFRS as the
single body of internationally accepted
financial reporting standards. In the next
few years, thousands of companies will
move to IFRS as a primary basis of
financial reporting.

THE IFRS MANDATE
WILL AFFECT U.S. COMPANIES.
Some may be required to adopt
IFRS to meet the reporting requirements
of an international parent or investor
company, while others may recognize the
need to voluntarily supplement their
current financial reporting with IFRS to
allow for an accurate comparison with
foreign competitors.

A U.S. COMPANY WILL HAVE
TO REPORT UNDER IFRS if it is
the subsidiary of a foreign company that
must use IFRS; has a foreign subsidiary
that must report according to IFRS; has
operations in a foreign country where
IFRS use is mandatory; or has a foreign
investor that must report according to
IFRS.

THE CONVERGENCE EFFORTS
OF FASB AND THE IASB already
have changed U.S. GAAP. As these efforts
continue, their effects on U.S. GAAP
will multiply. Both boards have issued
exposure drafts relating to the
near-term convergence of their goals,
and the IASB has published several
statements that narrow the differences
between U.S. GAAP and IFRS.

ross-border investors often find it
difficult to understand financial statements that
foreign companies prepare using their respective
nations’ accounting principles. But greater
uniformity and efficiency are coming to the
international investment community now that most
public companies domiciled within the European
Union (EU) will be required to use international
financial reporting standards (IFRS) beginning in
January 2005. This article will show CPAs how to
assist their employers and clients in preparing
for the impact of the EU requirements on their
financial reporting.

IFRS is a body of
accounting and financial reporting standards
developed by the International Accounting
Standards Board (IASB) (see “Players and Roles”).
Every major nation is moving toward adopting them
to one extent or another. The European Union
requires their use, the United States and Canada
are converging their versions of GAAP with IFRS
and some companies in other countries are using
them voluntarily.

Get Ready for IFRS

More than 300 SEC-listed
companies are headquartered in the European Union and thus are required to use
international financial reporting
standards beginning in 2005.

This trend
may dramatically affect the financial reporting of
U.S. companies that own, are subsidiaries of or
have other relationships with foreign entities
directly subject to an IFRS reporting requirement,
such as that of the European Union. Many foreign
companies registered with the SEC are
headquartered in countries that require them to
begin using IFRS in 2005; while these companies
are subject to the U.S. regulatory environment,
they also will have to adopt IFRS. And because
U.S. regulators and rulemakers are actively
supporting convergence, U.S. GAAP will evolve in
tandem with IFRS and thus affect even U.S.
companies with no overseas ties.

CPAs’
clients and employers will need help assessing the
effects these requirements will have on them. This
article therefore will help practitioners explain
to companies’ management how IFRS may affect their
reporting obligations.

INCREASING USE OF IFRS
A growing number of
jurisdictions require public companies to use IFRS
for stock-exchange listing purposes, and in
addition, banks, insurance companies and stock
brokerages may use them for their statutorily
required reports. So over the next few years,
thousands of companies will adopt the
international standards.

Countries in many
parts of the world already require companies to
adopt IFRS or will do so soon. The European
Commission (EC)—the European Union’s legislative
and regulatory arm—issued a rule that, with a few
exceptions, requires all public companies
domiciled within its borders to prepare their
consolidated financial statements in accordance
with IFRS beginning January 1, 2005. This
requirement will affect about 7,000 enterprises,
including their subsidiaries, equity investees and
joint venture partners.

Significantly, EU
companies on January 1, 2005, will lose the option
of using U.S. GAAP for listing purposes on foreign
stock exchanges. However, under the EC regulation,
EU member states may permit companies to defer
adoption of IFRS until 2007 if their shares
currently trade on a U.S. stock exchange and they
use U.S. GAAP (see “ Players
and Roles ”). EU member states also are
deciding whether to require or permit the use of
IFRS for statutory reporting purposes, such as for
the disclosures energy utilities must make to
government power authorities.

The
increased use of IFRS is not limited to
public-company listing requirements or statutory
reporting. Many lenders and regulatory and
government bodies are looking to IFRS to fulfill
local financial reporting obligations related to
financing or licensing.

Players
and Roles The European Union is an
economic and political alliance of
European states with 25 members (see
exhibit 2 ). The European
Commission, the European Union’s
authoritative legislative body, issues
accounting, financial reporting and other
rules.

The Financial Accounting
Standards Board (FASB)
is well-known to CPAs as
the designated organization in the
private sector for establishing
standards of financial accounting and
reporting. Consequently, it has been the
primary U.S. representative in
collaborative efforts to converge U.S.
GAAP with IFRS.

The International Accounting
Standards Board (IASB)
is an independent,
privately funded accounting standard
setter committed to developing in the
public interest a single set of high
quality, understandable and enforceable
global accounting standards that require
transparent and comparable information
in general purpose financial statements.
The board also cooperates with national
accounting standard setters—including
FASB—to achieve convergence among
standards around the world.

The SEC has
supported the work of the IASB and
repeatedly stressed the importance of
convergence of accounting principles
under IFRS and U.S. GAAP. In March the
SEC proposed amendments to Form 20-F,
Registration of Securities of
Foreign Private Issuers, that
would affect such entities adopting
IFRS. The proposals’ purpose is to ease
the burdens foreign companies will face
when they adopt IFRS for the first time,
to improve their financial disclosure to
investors and to encourage other foreign
companies to voluntarily adopt IFRS.

IMPACT ON U.S. ENTITIES
Although the use of
IFRS isn’t required in the United States, the new
standards could affect the financial reporting
activities of U.S. companies, regardless of their
size or of U.S. reporting requirements. The
following is a discussion of four possible
situations in which a U.S. company would be
required to use IFRS.

The U.S. company’s international parent
uses IFRS. If a U.S. company has
a parent headquartered outside the United States
that reports on an IFRS basis and has shares
publicly traded on a European exchange, the
subsidiary will have to prepare IFRS information
for inclusion in the parent’s consolidated
financial statements (see exhibit 1 ,
above). In some situations a U.S. company’s
financial statements previously may not have been
consolidated because its parent’s local version of
GAAP did not require it, but that is not so under
IFRS.

U.S. companies
might be required to report under IFRS. In
each column the bold oval represents the
U.S. company, and the other ovals
represent entities to which they are
related as owners, subsidiaries or
investees.

Consolidated
IFRS financial statements must be prepared using
uniform accounting policies, so the subsidiary’s
accounting policies must conform to its parent’s
for like transactions and other similar events,
such as the measurement of inventories. Unlike
U.S. GAAP, IFRS does not permit inventories to be
measured using the Lifo method. Therefore, the
U.S. subsidiary would have to gather information
on either an average cost or Fifo basis, depending
on the parent’s accounting policy.

CPAs
who previously prepared financial statements for a
U.S. subsidiary of a foreign company have
experience converting U.S. GAAP-based financial
statements into, for example, equivalents based on
French GAAP. These practitioners will, of course,
have to familiarize themselves with IFRS as a new
basis of accounting.

The U.S. company’s foreign subsidiary
uses IFRS. In a
U.S.-headquartered multinational corporation, all
subsidiaries that are publicly listed in the
European Union must comply with IFRS beginning
January 1, 2005. So EU subsidiaries will submit
IFRS statements to the parent, which may have to
convert them to U.S. GAAP for inclusion in its
consolidated financial statements. Consequently,
CPAs at the U.S. parent company should be aware of
IFRS reporting requirements and identify and
resolve any financial reporting issues related to
its consolidated financial statements. To ensure
their counterparts at subsidiaries are following
IFRS reporting requirements, practitioners at the
parent company should coordinate subsidiaries’
reporting activities. CPAs also might consider
advising U.S. companies in this situation to take
the opportunity to simplify their financial
reporting processes by settling on IFRS as a
uniform set of accounting standards for their
foreign subsidiaries around the world.

The U.S. company has foreign operations.
U.S. entities that have or are
seeking to establish operations in other countries
now may be required by local regulators or lenders
to prepare IFRS-compliant statements. This is
increasingly common in countries that have adopted
IFRS for listing purposes and it shows how
far-reaching IFRS reporting requirements may
become. CPAs should be alert to and prepared to
deal with such situations, of which the following
are examples:

A U.S. company issuing debt or equity
in a foreign capital market may be required to
prepare IFRS statements.

A U.S. company may be required by the
local government, tax or banking regulator to
provide IFRS statements.

A U.S. company’s foreign customers,
vendors or lessors may require IFRS statements.

A U.S. company acquired by a foreign
business may be required to provide IFRS
statements to the acquirer or a government
regulator.

Begin collecting
data for opening IFRS balance
sheet. The IASB will issue no
new standards required to be
applied in 2005, so companies
will not have to be concerned
about new standards of which
they are unaware.

A foreign investor in a U.S. company
uses IFRS. If a publicly traded
EU company—for example, a bank— owns 20% to 50% of
a U.S. company and previously accounted for its
investment using a form of equity accounting under
its local GAAP, the bank will be required,
beginning in 2005, to report under IFRS.
Consequently, the U.S. company will have to
prepare IFRS information for purposes of its
investor’s equity accounting. (Cost accounting
applies to ownership stakes smaller than 20%;
equity accounting is used for investments greater
than 20% but not more than 50%; and ownership of
more than 50% constitutes control, making the
owned entity a subsidiary of its parent.)

There also may be cases where the foreign
parent of a U.S. company has an investor that is
required to comply with IFRS. For example, let’s
assume that a Japanese company is the sole owner
of a U.S. subsidiary. The Japanese parent company
reports its consolidated financial statements
using local GAAP, while the subsidiary uses U.S.
GAAP for its local reporting. Let’s further assume
that a publicly traded investor based in Spain
owns 20% to 50%, inclusive, of the Japanese
company. Because that investor will have to file
IFRS statements beginning January 1, 2005, it will
need IFRS information to account for its
investment in the Japanese company. Therefore, in
order to apply the equity method of accounting in
the Spanish investor’s IFRS statements, the
Japanese company and its U.S. subsidiary both
would have to prepare IFRS-based information.

Another form of investment—joint ventures—also
may have to be accounted for on an IFRS basis if
it involves a foreign partner.

BENEFITS FOR VOLUNTEERS
In addition to the
above cases in which IFRS use is mandatory, CPAs
may identify situations when U.S. companies may
want to adopt IFRS voluntarily. If such a U.S.
company operates in an industry experiencing
significant foreign competition, such as banking,
insurance, motor vehicle manufacturing,
pharmaceuticals or telecommunications, the CPA may
advise its management to provide enough IFRS-based
information for foreign analysts and investors to
be able to compare its performance with that of
its peers and consider investing in the company.

PRACTICAL TIPS TO
REMEMBER

CPAs shouldn’t
underestimate the impact of
IFRS on U.S. companies, given
regulators and
standard-setters’ work to
converge IFRS and U.S. GAAP.

Practitioners
should become sufficiently
familiar with IFRS to identify
situations in which it may not
be obvious that a U.S. company
has an IFRS reporting
obligation. For example, a
company that has no ties to
foreign entities still may be
affected by IFRS-influenced
changes in U.S. GAAP.

CPAs who
previously prepared financial
statements for a U.S.
subsidiary of a foreign
company have experience
converting U.S. GAAP-based
financial statements into
equivalents based on French
GAAP, for example. These
practitioners will, of course,
have to familiarize themselves
with IFRS as a new basis of
accounting.

CPAs who work for
or have as a client a
U.S.-headquartered
multinational corporation
should be aware that all its
subsidiaries that are publicly
listed in the European Union
must comply with IFRS
beginning January 1, 2005.
This may require the parent
company to include in its
consolidated reports a U.S.
GAAP version of the
subsidiary’s IFRS statements.
Consequently, CPAs at the U.S.
parent company should be aware
of how IFRS reporting
requirements could affect the
parent company’s consolidated
financial statements.

CPAs should be
alert to and prepared to deal
with situations in which U.S.
entities that have or are
seeking to establish
operations in other countries
now may be required by local
regulators or lenders to
prepare IFRS-compliant
statements.

Practitioners
should familiarize themselves
with IFRS and its differences
from U.S. GAAP to advise
U.S.-based clients or
employers on changes in their
financial reporting
obligations if they are partly
owned by an investor required
to report using IFRS.

A CPA may advise
the management of a U.S.
company with significant
foreign competition to provide
IFRS-based information
voluntarily so that foreign
analysts can compare its
performance with that of its
foreign peers and consider
investing in such a company.

CONVERGENCE
CPAs should be aware
that efforts to create global accounting standards
not only are changing the role of national
standard-setters such as FASB, but also are
affecting U.S. GAAP. Greater U.S. participation in
the IASB’s activities has influenced its policies
more than ever before, as in the development of
accounting standards for business combinations.
And now the IASB’s standards are about to have a
strong impact on U.S. GAAP and financial
reporting. Recently FASB and the IASB have
formally agreed to converge U.S. GAAP and IFRS. To
that end they have begun to coordinate their
project agendas, with each board agreeing to
undertake projects to amend its current standards.
CPAs should stay abreast of these developments to
build and maintain their ability to advise their
clients and employers on IFRS-related obligations
and opportunities.

LOOKING AHEAD
Given the efforts to
converge IFRS and U.S. GAAP and the trend toward
adopting IFRS as the single body of
internationally accepted accounting standards,
CPAs shouldn’t underestimate their impact. While
U.S. companies may find it easier to make the
transition to IFRS from GAAP than companies
reporting under other bases of accounting,
adopting IFRS still may have pervasive and
fundamental effects on a company’s financial
reporting, creating a need and opportunity for
CPAs to identify and explain to company management
the benefits of and best practices for IFRS.

RESOURCES

AICPA Resources

CPE International Versus U.S. Accounting:
What in the World is the Difference? (# 731661JA).

AICPA InfoBytes courses

International vs. U.S. Accounting: An
Introduction. International vs. U.S. Accounting:
Business Combinations, Consolidation and Foreign
Operations. International vs. U.S. Accounting:
Current Assets. International vs. U.S. Accounting:
Financial Instrument and Other Reporting Issues. International vs. U.S. Accounting:
Format and Structure of IAS Financial Statements. International vs. U.S. Accounting:
Leases, Intangibles, and Asset Impairment. International vs. U.S. Accounting:
Liabilities. International vs. U.S. Accounting:
Property, Plant & Equipment, and Investment
Property.

There are over 30 million small businesses in the U.S., and many of them are optimistic in their outlook. Are you familiar with the obstacles and opportunities they are facing? Test your small business acumen with this quiz sponsored by Chase Ink®.